PHILADELPHIA (Reuters) - The U.S. Environmental Protection Agency’s decision to grant a bankrupt Philadelphia refiner relief from biofuel laws drew criticism on Tuesday from the country’s biofuels sector and its allies, who said it sets a bad precedent.

FILE PHOTO: The Philadelphia Energy Solutions oil refinery owned by The Carlyle Group is seen at sunset in Philadelphia March 26, 2014. Picture taken March 26, 2014. REUTERS/David M. Parrott/File Photo

The EPA and the Carlyle Group-backed Philadelphia Energy Solutions refinery agreed on Monday that the refiner will have to satisfy only roughly half of its $350 million in outstanding compliance obligations under the U.S. Renewable Fuel Standard (RFS). The RFS requires refiners to blend biofuels such as ethanol into their fuel or buy credits, known as RINs, from those that do.

Independent refiners, including some as large as Valero Energy Corp, have long complained about the RFS standards, saying it has boosted costs as the price of credits rose from just a few cents in 2012 to more than $1 at times in 2013 and 2016.

However, biofuels companies say the standards are critical to Midwest farmers and help produce cleaner, home-grown fuels like ethanol. Industry representatives complained about the EPA settlement, calling it a bailout for a mismanaged company.

“I am very troubled at the precedent this sets and there are discussions underway whether the EPA has the legal standing to grant the relief. We are exploring our options,” said Michael McAdams, head of the Advanced Biofuels Association.

President Donald Trump has called several White House meetings to change the program.

The EPA has signaled it is willing to exempt more small refineries, which would limit potential buyers for the credits.

Republican Senator Chuck Grassley, of Iowa, said the settlement raises a couple questions: “How are the RIN obligations being treated compared to the other obligations of PES? Does this set an unfair precedent for other refiners that continue to act in good faith to comply with the law?”

PES was given relief on about half of its outstanding obligations. The company, which lacks blending facilities, entered into bankruptcy owing 467 million credits from 2016 and 2017, with only 210 million credits in hand, the filing showed.

The settlement puts PES on stable path to success and protects 1,100 jobs, Cherice Corley, a company spokeswoman, said in an email Tuesday. But more needs to be done, Corley said.

“This is only a partial and temporary reprieve, and we are hopeful that policymakers will substantively address the flawed RINs compliance mechanism so that a restructured PES and other independent merchant refiners can finally compete on a level playing field,” Corely said.

PES got a huge win. It does not have to go into the market and buy some 250 million in compliance credits covering 2016, 2017 and part of 2018. The refiner can turn over its available credits to the EPA, and is excused from any shortfall.

“There’s no denying it - the EPA settled in a way that was beneficial to the bankruptcy and this particular firm. It sends a bad signal about what the EPA will accept in the future,” said Scott Irwin, agricultural economist at the University of Illinois.

PES blamed its financial woes on the cost of buying the credits.. But other factors contributed to the bankruptcy, including withdrawal of more than $590 million in dividend-style payments from the company by its investor owners.

Private equity firm Carlyle rescued the refinery from shutting in 2012, putting up $175 million for majority control. Most dividends paid to the investor group were backed by loans taken against refinery assets.

Monday’s settlement alleviates fears that the refinery was going to be exempt from the program moving forward or be allowed to dump millions of credits onto the market, traders said.

The EPA will now require PES to buy credits semi-annually, rather than annually. That makes it more difficult for the refinery, the largest on the U.S. East Coast, to build a large short position or defer its obligations and risk getting into a hole, as it did in 2017.

Prices for renewable fuel (D6) credits for 2018 were at 39 cents on Tuesday, little changed from a day earlier, having already lost 40 percent in the last two weeks. Prices for 2017 are selling at an unusual discount versus the 2018 prices in the wake of the PES settlement, traders said.